Derivatives

We utilize derivative financial instruments to hedge certain interest rate risks associated with our long-term debt and commodity price risks associated with forecasted future natural gas requirements. These derivatives qualify for hedge accounting since the hedges are highly effective, and we have designated and documented contemporaneously the hedging relationships involving these derivative instruments. While we intend to continue to meet the conditions for hedge accounting, if hedges do not qualify as highly effective or if we do not believe that forecasted transactions would occur, the changes in the fair value of the derivatives used as hedges would be reflected in our earnings. Our contracts with counterparties generally contain right of offset provisions. These provisions effectively reduce our exposure to credit risk in situations where the Company has gain and loss positions outstanding with a single counterparty. It is our policy to offset on the Condensed Consolidated Balance Sheets the amounts recognized for derivative instruments executed with the same counterparty under a master netting agreement.

We do not believe we are exposed to more than a nominal amount of credit risk in our natural gas hedges and interest rate swaps as the counterparties are established financial institutions. The counterparties for the derivative agreements are rated BBB+ or better as of June 30, 2019, by Standard and Poor’s.

Fair Values

The following table provides the fair values of our derivative financial instruments for the periods presented, all of which are cash flow hedges:



(dollars in thousands)		Fair Value of Derivative Assets
(dollars in thousands)	Balance Sheet Location	June 30, 2019		December 31, 2018
Interest rate swaps	Prepaid and other current assets	$	—	$	1,425
Natural gas contracts	Prepaid and other current assets	—		226
Natural gas contracts	Other assets	—		39
Total derivative assets		$	—	$	1,690

		Fair Value of Derivative Liabilities
Interest rate swaps	Accrued liabilities	$	1,080	$	—
Interest rate swaps	Other long-term liabilities	12,363		5,713
Natural gas contracts	Accrued liabilities	854		—
Natural gas contracts	Other long-term liabilities	87		—
Total derivative liabilities		$	14,384	$	5,713

The following table presents cash settlements (paid) received related to the below derivatives:



	Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2019			2018			2019		2018
Natural gas contracts	$	(65	)	$	(36	)	$	63	$	(234	)
Interest rate swaps	347			(3		)	691		(181		)
Total	$	282		$	(39	)	$	754	$	(415	)

The following table provides a summary of the impacts of derivative gain (loss) of our cash flow hedges on the Condensed Consolidated Statements of Operations and other comprehensive income (OCI):



		Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	Location	2019			2018			2019			2018
Derivative gain (loss) recognized into OCI:
Natural gas contracts	OCI	$	(1,106	)	$	123		$	(1,143	)	$	334
Interest rate swaps	OCI	(4,987		)	480			(8,465		)	1,733
Total		$	(6,093	)	$	603		$	(9,608	)	$	2,067

Derivative gain (loss) reclassified from accumulated OCI to current earnings:
Natural gas contracts	Cost of Sales	$	(65	)	$	(36	)	$	63		$	(234	)
Interest rate swaps	Interest expense	335			40			690			(103		)
Total		$	270		$	4		$	753		$	(337	)

Natural Gas Contracts

We use natural gas swap contracts related to forecasted future North American natural gas requirements. The objective of these commodity contracts is to limit the fluctuations in prices paid due to price movements in the underlying commodity. We consider our forecasted natural gas requirements in determining the quantity of natural gas to hedge. We combine the forecasts with historical observations to establish the percentage of forecast eligible to be hedged, typically ranging from 40 percent to 70 percent of our anticipated requirements, 18 months in the future, or more, depending on market conditions. The fair values of these instruments are determined from market quotes.

The following table presents the notional amount of our natural gas derivatives on the Condensed Consolidated Balance Sheets:



		Notional Amounts
Derivative Types	Unit of Measure	June 30, 2019	December 31, 2018
Natural gas contracts	Millions of British Thermal Units (MMBTUs)	3,710,000	3,150,000

Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses would be recorded to earnings immediately. Changes in the fair value of these hedges are recorded in other comprehensive income (loss). As the natural gas contracts mature, the accumulated gains (losses) for the respective contracts are reclassified from accumulated other comprehensive loss to current expense in cost of sales in our Condensed Consolidated Statement of Operations.

Based on our current valuation, we estimate that accumulated losses for natural gas contracts currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in a loss of $0.9 million in our Condensed Consolidated Statements of Operations.

Interest Rate Swaps

The table below lists the interest rate swaps we executed as part of our risk management strategy to mitigate the risks associated with the fluctuating interest rates under our Term Loan B. The interest rate swaps effectively convert a portion of our Term Loan B debt from a variable interest rate to a fixed interest rate, thus reducing the impact of interest rate changes on future income.



Swap execution date	Effective date	Expiration date	Notional amount	Fixed swap rate
April 1, 2015	January 11, 2016	January 9, 2020	$220.0 million	4.85	%
September 24, 2018	January 9, 2020	January 9, 2025	$200.0 million	6.19	%	⁽¹⁾

________________________


⁽¹⁾	Upon refinancing our Term Loan B, the fixed interest rate will be 3.19 percent plus the new refinanced credit spread.

Our interest rate swaps are valued using the market standard methodology of netting the discounted expected future variable cash receipts and the discounted future fixed cash payments. The variable cash receipts are based on an expectation of future interest rates derived from observed market interest rate forward curves.

Our interest rate swaps qualify and are designated as cash flow hedges at June 30, 2019, and are accounted for under FASB ASC 815, "Derivatives and Hedging." Hedge accounting is applied only when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses are recorded to earnings immediately. Changes in the fair value of these hedges are recorded in other comprehensive income (loss). Based on our current valuation, we estimate that accumulated losses currently carried in accumulated other comprehensive loss that will be reclassified into earnings over the next twelve months will result in an increase to interest expense of $1.1 million in our Condensed Consolidated Statements of Operations.